Author: Li Dan
Source: Wall Street News
Federal Reserve officials made concentrated remarks on Thursday, April 4th, Eastern US time. Three regional Fed presidents sent relatively hawkish signals regarding the path of inflation and interest rates. They indicated that the core dilemma currently facing the Fed is choosing between maintaining patience by keeping rates steady or proactively raising interest rates to suppress persistently high inflation. One official explicitly stated that AI is currently neither pushing inflation higher nor lowering it, having limited impact on short-term monetary policy decisions.
Kansas City Fed President Jeffrey Schmid bluntly stated that inflation is the top risk facing the US economy and, for the first time publicly, included interest rate hikes in policy discussions, omitting any mention of rate cuts.
San Francisco Fed President Mary Daly noted that monetary policy is currently in a reasonable position, but economic uncertainty is too high, and providing forward guidance could potentially mislead markets. The Fed is prepared to "respond in both directions." Market interest rate futures indicate that investors now perceive the probability of a rate hike within the year as having risen to a relatively high level.
The Fed is scheduled to hold its next monetary policy meeting, the Federal Open Market Committee (FOMC) meeting, on June 16-17. This will be the first FOMC meeting chaired by the new Fed Chair, Kevin Warsh, and the market widely expects the policy rate to be held steady at that time.
Both Daly and Richmond Fed President Thomas Barkin, who also spoke on Thursday, have FOMC voting rights next year and in 2027, while Schmid is a voting member in the following year, 2028. Therefore, their statements are receiving significant market attention.
Schmid: Rate Hike Option is on the Table, Considering Whether Inflation is Temporary
Schmid was direct in his remarks at an economic forum in Oklahoma on Thursday, explicitly putting rate hikes on the table as an option.
He said: "The big question now is, do we remain patient? Our inflation numbers may have climbed to around 3.5%, no one likes that number. Is it temporary... or should we take action? Should we say, okay, it's time to raise rates 25 or 50 basis points and see if we can push it down?"
Schmid's comments reflect deepening concern within the Fed about the persistence of inflation. Previously, Fed officials generally believed that inflation driven by tariffs and oil prices would naturally subside over time, but this assessment is now facing challenges. According to Reuters, the Fed's policy rate has been held in the 3.5% to 3.75% range since last December, while inflation has remained above the 2% policy target for over five consecutive years.
Schmid made no mention of the possibility of rate cuts throughout his remarks. This stands in stark contrast to the stance at the beginning of the year when most officials considered rate cuts the baseline scenario. He emphasized that the 2% inflation target facilitates clear communication, and the Fed should not be ambiguous on this issue, "should not let that message become fuzzy."
Daly: Prepared to Respond in Both Directions, Forward Guidance Could Be Misleading
Speaking at the Bloomberg Tech Conference in San Francisco on Thursday, Daly said monetary policy is currently in a good place, but economic uncertainty is too high to provide clear guidance on the direction of interest rates.
She said: "We are prepared to respond in both directions on rates, no matter how the economy evolves. I think providing more forward guidance at this point could ultimately be misleading because we have to wait for the economic picture to evolve."
On inflation, Daly noted that the Fed's preferred inflation gauge rose 3.8% year-over-year in April, the largest increase since 2023. She attributed the main drivers of current inflation to tariffs, as well as rising energy and food prices following the outbreak of the Iran war—persistently rising oil prices have spread to prices of goods like fertilizer and equipment. Regarding the job market, she mentioned the current unemployment rate is 4.3%, with the labor market showing signs of stabilization.
Daly stated that as the economic situation develops, more officials are leaning towards the Fed making it clear that all options, including both rate cuts and hikes, are under consideration. According to federal funds futures contracts, investors currently see a higher likelihood of a rate hike within the year.
Daly: AI Could Lower Inflation in Five to Ten Years, No Widespread Productivity Boost Seen Currently
Addressing the widely discussed impact of AI on the economy, Daly stated that AI is currently neither a factor pushing inflation higher nor has it manifested widespread productivity gains at the macroeconomic data level.
She said, "We have not yet seen a widespread productivity boost," and the return on business investment in AI "remains to be realized," but business enthusiasm for the technology is "pretty strong."
According to reports, Daly believes that within a five-to-ten-year timeframe, AI has the potential to be a force lowering inflation. However, for monetary policy operating on a 12-month horizon, this AI effect is "not a pressing issue."
She also pointed out that currently, generative AI is primarily used to assist workers rather than replace them. Whether AI-driven productivity gains ultimately bring about deflationary effects depends crucially on timing.
Daly expressed optimism about AI, expecting 2027 to be a "litmus test" year for the AI industry.
Barkin: Job Market Balanced, No Signs of Labor Shortage Tension
Speaking after an event in Loudoun County, Virginia, on Thursday, Barkin said the U.S. labor market is currently in a balanced state, with no significant increase in overall labor demand.
He said, "I'm not seeing any change in the job market," noting signs of rising demand in technical occupations and healthcare, but overall, the job market is not tight.
Barkin stated that in conversations with employers, "I'm not hearing the kind of concerns I would call frothy, tight." This assessment aligns with Schmid's view that the overall economy is performing well and with Daly's mention of labor market stabilization, further supporting the Fed's current stance of holding steady and awaiting more data.
